Target security breach likely to speed adoption of more secure chip-based cards in U.S.

The recent Target credit card breach is set to generate a boom in demand for higher-security, dual-interface cards, with U.S. shipments forecast to surge twenty-fold from 2013 to 2018, according to a report from IHS Inc.

IHS Inc.

01/22/2014

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The recent Target credit card breach is set to generate a boom in demand for higher-security, dual-interface cards, with U.S. shipments forecast to surge twenty-fold from 2013 to 2018, according to a report from IHS Inc.

Shipments of the higher-security cards to U.S. consumers will grow from 12.6 million in 2013 to 251.2 million by 2018, according to the report "Payment and Banking Cards–World–2013."

An estimated 40 million credit card records and 70 million other records were stolen from Target customers during the 2013 holiday season, representing one of the largest credit card breaches in history.

"It is clear that Target is going to have to do something significant and dramatic in order to win back customers and regain consumer confidence," said Don Tait, senior financial and ID market analyst at IHS. "Moreover, the Target security breach may prove to be the catalyst that speeds up the adoption of more secure chip-based payment and banking cards in the U.S."

Chip-based cards such as EMV (Europay, MasterCard and Visa)—a global standard using integrated circuit (IC) cards and IC card-capable point-of-sale (POS) terminals and ATMs for authenticating credit and debit card transactions—offer consumers greater protection against fraud than traditional magnetic stripe cards, which may require processing of only the card number and validity dates. While EMV cards are widely used around the world, they represent only a tiny fraction of the 1.3 billion payment and banking cards in circulation in the U.S.

"Criminals are likely to migrate to areas where fraud is easier to carry out," Tait noted. "With the majority of the rest of the world well down the EMV migration road, the U.S. represents an easier target for criminals bent on financial fraud."

Coupled with the security breach at Target, card issuers are preparing to implement a number of liability shifts in the next two years that will likely further speed EMV migration in the U.S. These include:

Effective October 2015, American Express will transfer liability for certain types of fraudulent transactions away from the party that has the most secure form of EMV technology.

In October 2015, Visa intends to institute a U.S. liability shift for domestic and cross-border counterfeit POS transactions.

MasterCard has announced that after October 2016, banks can hold ATM operators liable for fraudulent withdrawals and cash advances from credit and debit cards.

Despite the host of factors driving the adoption of chip-based cards, the costs to do so will be significant, Tait noted.

"It is not just the expense of replacing payment cards that needs to be taken into consideration, there is also the cost of replacing the payment infrastructure, including the POS terminals at merchants’ premises. It has been estimated that the cost of updating the U.S. to EMV—cards and card payment network—ranges from $18 billion to $20 billion."